Third-Party Funding in Patent Litigation: Opportunities and Challenges

Third-party funding of patent litigation is a rapidly evolving aspect of intellectual property law, as highlighted in a recent report by the U.S. Government Accountability Office (GAO). The practice, which involves non-recourse funding from an outside party in exchange for a share of potential proceeds, is increasingly prevalent in the United States. Initially gaining traction around 2010, third-party funding has become a significant player in patent enforcement, offering resource-constrained patent owners a means to litigate complex and costly cases.

The GAO report identifies key factors influencing funding decisions by third-party entities. Funders prioritize cases with high-quality patents, strong infringement claims, and realistic settlement expectations. They also thoroughly vet cases to mitigate the inherent risks of patent litigation, such as the potential invalidation of patents by the Patent Trial and Appeal Board (PTAB). Funders often require two to three times their initial investment as returns before the patent owner can access any proceeds from a successful lawsuit, underscoring the high stakes involved.

One of the most compelling aspects of third-party funding is its ability to level the playing field for smaller patent owners, such as individual inventors and universities. By providing financial support, funders enable these entities to defend their intellectual property against more prominent players who might otherwise dismiss licensing agreements in favor of infringement. Universities, in particular, view this funding as essential for protecting taxpayer-funded research and maintaining the commercial viability of their patent portfolios.

However, the practice is not without its challenges. Technology companies, often defendants in these cases, argue that third-party funding increases litigation costs and complicates settlement dynamics. Defending against well-resourced plaintiffs forces these companies to allocate significant financial and personnel resources, diverting focus from core operations. Additionally, the involvement of third-party funders can extend settlement timelines as plaintiffs may prioritize covering funding obligations over reaching a resolution.

The issue of transparency looms large in discussions about third-party funding. The lack of mandatory disclosure requirements makes it difficult to determine the full extent of its influence on patent litigation. Stakeholders have differing views on whether disclosure should be mandated. Proponents argue that it could uncover potential conflicts of interest and foreign involvement in U.S. patent cases, enhancing transparency and judicial fairness. Critics, however, warn that disclosure could bias litigation by revealing a plaintiff's financial capacity and increasing the burden on the court system.

The GAO report also delves into the potential impact of foreign-sourced funding on national security and economic interests. Some stakeholders express concerns about foreign entities using litigation funding as a strategic tool to undermine U.S. industries. Despite these apprehensions, courtroom safeguards such as protective orders aim to mitigate risks related to sensitive information disclosures during discovery.

This blog post is for informational purposes only and does not constitute legal advice. While every effort has been made to ensure accuracy, the information provided is not guaranteed to be complete or up-to-date. For specific legal concerns, please consult a qualified attorney.